The pound simply had an awful day in the fx market yesterday as the latest batch of data seemed to go a long way to confirm the worst outlook possible for the UK economy.
The Office of National Statistics (ONS) reported that UK public sector net borrowing (excluding the temporary effects of financial interventions) reached £15.9 billion in August, versus £14.0 billion one year ago. The consensus estimate was for a reading of £11.3 billion.
Yesterday morning also saw the publication of the minutes from the latest Bank of England Monetary Policy Committee (MPC) meeting from the beginning of September. The MPC voted unanimously to keep UK interest rates at the record 0.5% low and the asset purchase programme, commonly known as Quantitative Easing (QE) unchanged at £200 billion in its latest monthly meeting but moved closer towards embarking on an expansion of the QE program.
According to the minutes, some members “thought that it was increasingly probable that further asset purchases to loosen monetary conditions would become warranted at some point.”
As the pound begun to fall so the euro received some support after an announcement by Greece that it will increase the pace of austerity measures by cutting pensions, increasing taxes and slashing public sector employment as part of measures to meet fiscal targets in accordance with its bailout. State pensions will be cut by as much as 20% and 30,000 civil servants will be suspended on partial pay, up from the 20,000 previously proposed.
Government spokesman Ilias Mossialos said measures will allow Greece to comply with the bailout plan up to 2014.
“These choices are sending a message to markets and our partners that Greece wants to and can fulfil its obligations and remain firmly in the very core of the euro and the European Union,” he said.
The measures are being imposed in exchange for a €8bn tranche of aid.
Overnight, the US Federal Reserve announced its widely anticipated ‘operation twist’ and traders piled into the dollar. The announcement by the Federal Reserve that it would swap shorter-term bonds for securities with extended maturities, in a move that is hoped will push down long-term interest rates and give the US economy a boost.
In a detailed statement the Fed said it intends to buy $400 billion of bonds by the end of June 2012 with remaining maturities between six years and 30 years. The markets remain cautious about the move as it is a policy tool that has never been used by the central bank before.
Commentary by Tony Redondo
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